VC startup idea - PE or VC interest? Are these numbers viable?

Seeking ~14mm in VC capital for a startup

(in multiple funding rounds...starting with a 2mm Seed round)

Can you guys give me a list of 10-20 VC firms that I should approach for my seed round?

(lots of background info below....but all just in an effort to help those with industry knowledge to provide a list of VC firms that are actively making Seed investments in the FinTech space)

I have an idea for a startup in the financial markets exchange realm, but it will require significantly more capital and developer-hours than I can put in myself. I think its a candidate for a VC firm, but I've never pitched to a VC firm, so maybe some people on this board can point me in the right direction.

My background: BB IT Developer (programmer) --> Market Maker --> Prop Trader

The startup is a new type of trading exchange that takes advantage of the current regulatory and BB fixed income brokerage model (BBs have been pulling back and cutting costs on certain industries). There are a few other startups in this arena, but they all specialize in certain niches, and lack multiple aspects of what would create the "ideal" exchange platform for these products/securities, and most of these other startups have not generated enough scale/market saturation to reach exit potential (i think because of their business model - can be done much better than current operators).

The TAM (total addressable market) is about 20 billion/year.

By my estimate, my company (when grown to scale) should be able to capture in the range of 1-5% of that market. More TAM% would, of course, be great...and its "possible" to achieve 10%, but in seeking to be reasonable, I don't want to be caught as overly optimistic.

Doing the math on 1% of the total addressable market, this company should generate ~200mm revenue when fully operational within ~5 years...and about 80mm/year of profit on that 200mm (so an 800mm target exit valuation, depending on what kind of multiple these companies sell for...i'm just assuming 10x profit). These numbers are assuming average market penetration. The potential is for more, but I'm not going to say "if I get 10% of the market, we'll make 2bln/year" because I don't think 10% market saturation is reasonable to expect (tho would be nice).

IEX is a good comparison....they are about 6 years old, and made about 50mm last year (or so i read)
BondPoint sold for 400mm in 2018
TMC sold for 685mm in 2018
TruMid raised 37mm in 2017 and is valued at 100mm+
Nasdaq bought eSpeed for 750mm

And there are others...but there is still room in the exchange business for untapped/inefficient business models

I have a tech/programming and trading background, so i know exactly what the platform should look like, and I have a basic idea of the programming work involved. I'm estimating that it will cost all in about 10-15mm to get this exchange self-funding and profitable (that 10-15mm includes basic rent, IT developers, a sales force, and all the other admin stuff that comes along...but the bulk of the expense is developers that will cost 150-250k/year + stock options).

Ok, so anyway...who do I pitch my idea to? Is there a list of VC firms and ways to contact them? What kind of equity valuation should I be seeking at this point from a Seed VC? (Right now, this startup is just an idea in my head)

Other thoughts?

Comments (53)

Jan 24, 2019

Your math doesn't work at all for a VC FWIW and PE doesn't touch pre-revenue.

VCs NEED massive massive massive multi-billion dollar exits to make their portfolio thesis work. Your big win MUST pay for all their losers, and they have a lot of losers.

This is solvable though. Rethink the solution/product into something with a huge TAM.

Also...what you need to do is figure out how you can prove concept with a lot less money, once you have that traction you can maybe raise an 8 figure round. Unless you're an experienced entrepreneur with an exit under your belt or have a world class team ready to go, you're not going to get 8 figures in a prerev funding right off the bat with no traction.

Jan 24, 2019

lets say i breakup the funding to 3 VC rounds

round 1 - (seed) 2mm (funds 1st 18 months of runway) (15% equity) (13mm valuation)
round 2 - 4mm (funds 2nd 18 months of runway with larger team) (15% equity) (26mm valuation)
round 3 - 8mm (funds 3rd 18 months of runway with even larger team) (15% equity) (53mm valuation)

(also have to prepare to give away 10-15% to employees)

by the end of year 3-4 the company should be generating enough revenue to be self funding.

Using the other companies in this market which have sold for 400mm-750mm for comparison...and that type of exit...which means an 800mm exit with a potential return table within 5-7 years of:

60x return for stage 1 investor
30x return for stage 2 investor
15x return for stage 3 investor

I've read that the median deal size for seed companies is now $2.2M, with a median post money valuation of $10.7M...so i think i'm in the ballpark. I might need to give my seed investor 20% (instead of 15%)....but any more and i'll end up with such a small % of the final company.

The numbers i've posted are what i strongly believe are achievable. Now, i could go out the risk curve and add additional related business which could POTENTIALLY bring annual profit to 100-200mm+....which would bring the exit value to 1-2 bln+ which would double those returns...but there is more risk in that projection (harder to achieve) and i don't want to seem like my head is in the clouds.

My 1st goal is to convince a VC firm to invest 2mm in my seed round for ~ 15%. (this is what i need to create a minimum viable product...a trading exchange has lots of moving parts and will require tens of thousands of developer programming hours at an avg cost of $100/hour)
Then after 18 months of operation i'll be able to present proof of concept and line up the 1st generation of customers....to raise 4mm round 2...etc...

My primary question is...which VC firms should i approach...and how do i go about doing that?

just google it...you're welcome

Jan 25, 2019

Seems interesting but out of curiosity where is your project at the moment? Have you raised seed funding? Have you started developing a product?

Jan 25, 2019

right now, this project is just a basic power point presentation.
I've done some research to understand what work needs to be done, but have not raised any capital yet.
Development is still in sketch mode (so, no real code written yet...just diagrams and psuedo-code).

just google it...you're welcome

Jan 25, 2019

Its gonna be hard to raise 2m with this in my opinion. Try to find a team that would be interested in the project and work on it for 3/4 months FT and then try to raise 2m. You could try to do an angel round now to allow you to work for 3/4 month on it.

VCs are usually looking for a team of more than 1.

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Jan 25, 2019

Fintech VC's may be a good start but before you send them a single email, you're going to need far more to show them than a powerpoint deck. Ideas are dime a dozen. Most people are going to want to see at least a basic prototype. Hell, even accelerators typically ask for more than just a deck, the founder's skills and background notwithstanding.

As someone else above mentioned, you may want to consider bringing on at least another co-founder and start working on a very rudimentary product that can demonstrate your value prop. Once you have that, this early in the game accelerators/incubators may still be a better target than VC's. If nothing else, getting accepted into one or more and going through their bootcamp will give you some credibility.

Edit: Where I'm based, at least two major banks have started pretty significant in-house incubators for third-party ideas. So what you mentioned about going to a large company may have some teeth if you can find the right companies to go to. Again, be mindful of their minimum requirements, which may well be more than a deck.

    • 1
Jan 25, 2019

do you have a list of Fintech VCs and in-house incubators that this startup concept might be compatible with?

i can build a VERY rudimentary product for demonstration purposes....but this would be a totally hacked together thing with minimal functionality that would not be used for anything other than these investor presentations.

just google it...you're welcome

Jan 25, 2019
Jan 27, 2019
Bateman Begins:

Edit: Where I'm based, at least two major banks have started pretty significant in-house incubators for third-party ideas.

would you mind sharing those banks?

just google it...you're welcome

Jan 25, 2019

Sounds like you have a solid idea and a half-baked business plan. Off to a good start, already further than most people who say they want to build a business.

From my experience pitching VCs I'd say that you're going to need solid traction with users/customers to raise the kind of money you're talking about. To ask for a $15mm valuation pre-prototype/MVP and without a founding team will generally get you laughed out of a room.

My advice - if you decide to raise pre-MVP, find angel investors through your network of co-workers or industry professionals. Since you've been at a BB and this is a FinTech play, this will be your best route as the people in your professional network should quickly see the value proposition (if any) of your product, and will have connections to institutional decision makers and other people with ca$h staxxxx ready to be deployed.

Also, I HIGHLY recommend bringing on a co-founder that has strengths where you're weakest. It sounds like you have the technical chops to understand the development/technical side, but can you sell? Can you spend time vetting potential angel investors and build rapport? Can you create pitch books that sell the vision and articulate that vision to prospective investors during presentations? Do you have a fundraising track record? Do you have a defined go-to-market strategy?

One thing I've learned from founding companies is that you can't do everything on your own. Find someone that brings complimentary skills to the table, compensate them with a sizable chunk of equity and re-invest your time, effort, energy, and disposable capital into the biz.

"Out the garage is how you end up in charge
It's how you end up in penthouses, end up in cars, it's how you
Start off a curb servin', end up a boss"

    • 1
Jan 25, 2019

My former work contacts have gone stale / bridges burned...so that route is not an option.

There must be a way for a programmer with an idea for an enterprise IT product to convince a VC that the idea is good, and i'm the guy to lead it. Isn't that what Seed funds that invest 2mm and expect 15-20% equity do?

This enterprise software product will take years to build without a massive team of developers. I could hack together a prototype, but it would not really be functional in any substantial way...it would effectively just be a series of linked pictures, which creates no real value.

just google it...you're welcome

Jan 25, 2019

Not impossible to raise a $1m+ seed round pre-product but it's definitely challenging. It depends on where you're raising the money and the general risk tolerance of the geography. If you're in a tech or finance hub your odds of successfully pulling it off are higher but there are still tons of post-launch, rev generating startups competing for the same funding.

I can 100% relate to where you're coming from on the dev side. It's a "chicken and egg", can't launch a good product without funding, can't get funding without users, can't get users without product. The early days are full of torture like this.

The best route is to build a Prototype/Demo that does 1 thing better than all the alternatives and go get sales as early as possible. If you go to a VC and tell them you have $500k in pre-sales from x amount of clients, they'll be interested.

If you' do get a $2mm pre-product and pre-sales investment offer be ready to get BENT over on equity, liquidation preferences, and other deal terms. If you have sales you have leverage.

"Out the garage is how you end up in charge
It's how you end up in penthouses, end up in cars, it's how you
Start off a curb servin', end up a boss"

    • 1
Jan 26, 2019

anybody have a list of Seed VC firms from crunchbase for me to contact? Google gives me hundreds...but i'd rather stand on the shoulders of giants and just reach out to 10-20 if that's possible? (and not waste the fee $$ if i can avoid it)

just google it...you're welcome

    • 1
Jan 29, 2019

@Mephistopheles, @StrapYourBoots and @m_1 already provided great points (and in a lot of detail). But it just feels like they are trying to provide you good advice and you're ignoring them / talking through them...

I'm not going to rehash everything, but I would agree with what was said about you having a difficult time getting people to buy into an idea without some form of traction or basic solution in place. And that it will be an extreme uphill battle with a lot of VCs. Also, your thought on people love providing free advice and good karma and all that - sure, that's something occasionally done to be good players in the startup and VC ecosystem. But we don't have time to meet with every single entrepreneur to provide advice and mentorship (the days are already extremely packed with meeting founders that actually have startups that are actually within our respective strike zone in terms of stage and maturity). We are heavily consumed with reading/research, thesis development, meetings with upcoming startups, working with our existing portco's, networking, ecosystem events.

If you do a bit of reading, you'll find that some VCs don't even meet with startups (or in your case, a founder to be) unless they have a warm intro (or at least a reasonable "I know a guy / girl, who's working through something..."). The last time I met with someone without a MVP was a recommendation from a fellow VC. And this person was a pretty well connected guy who was already planning to join a team to build something out. (It was way too early, but interesting to keep tabs on - and primarily driven on a reco).

What you may want to look for is "pre-seed" funding (as the already vague definitions of seed and series A, and their average raise, range of valuations, and firm's maturity have shifted over the years). There are some super early stage funds out there. Consider looking at angel investors / family & friends. Also consider talking to some accelerators (to get a sense of whether they would be interested in you). Accelerators usually take some equity (say 4-6%) for you to be part of their program. They then provide you with their network of mentors and investors, a coworking space, marketing, and startup founder training 101. They don't actually provide you funding (though I suppose the ones that have active funds could put some money in), but it's something to consider if you're trying to get access to a network and ecosystem. In your case, I think others' thoughts on finding cofounder(s) to round out your skill set, finding angels, focus on building something out, should be your focus.

If you want to better understand VC land, read Venture Deals. Also, talk to some startup founders that have successfully raised money. Don't target VCs that aren't looking for what you're selling (stage and sector wise).

Lastly, just an observation, it has been difficult for capital markets oriented fintechs to have raised capital. The reason is due to high regulatory barriers, and also the higher level of sophistication required (both from the founders, and also their clients). Because of that, it's harder to sell into / disrupt / carve a niche out, and because it's harder on avg, it means there's far less capital chasing such opportunities.

    • 4
Jan 29, 2019

It sounds like you guys are all talking about trying to raise a Series A round....but i'm down here trying to get a Seed VC to talk to (which i've read the definition to be anywhere from 50k-2mm)

I understand that there would be less risk to the VC if i was further along with a MVP and customers using my product....but building an aggregation financial exchange is a lot more complicated than building the early version of facebook (because of the regulatory burden, and the legacy infrastructure at the ibanks that i'll need to connect to...plus all the features that i'll need to build to gain the attention of my customers)...and getting "further along" will require a team of developers and over 1-2 years of coding by that team.

If i was just building a mobile app for a phone, i could probably code the MVP myself....but there are so many other pieces involved in an aggregated exchange that building a MVP is not much less effort than building the final product, and users in this market (hedge funds/traders) have no interest in using a half-baked product anyway.

My main competitor is TMCBonds (acquired by ICE for 685mm last year...along with BondPoint for 400mm)....and they are only doing 400mm/day of volume (so, penetration is still in its infancy). For comparison, the US Treasury market trades 400bln/day, on avg. So, i will need to build more/better functionality than TMC has before i can try to get customers to use my platform.

just google it...you're welcome

Jan 30, 2019

Just a heads up, the formula of "TAM is huge so we just need a tiny % of TAM" is a classic red flag for VCs. They often take it as a sign that either you haven't thought about your TAM in a specific enough way (because it's so huge) or you haven't thought about your competitive advantage enough (because you only think you can grab 1% of it). They'd rather hear 10% of large than 1% of huge, for example. Even better would be 30% of medium. That might work out to a smaller $ amount than 1% of huge, but it holds you accountable for having a clear competitive advantage.

Unless you're in a very small city, there's probably a solid angel group that does $1m+ rounds for seed stage companies. They're accustomed to seeing some revenue, but pre-revenue isn't totally out of the question for them.

Jan 30, 2019

You guys are giving OP great feedback, although I disagree that he's ignoring it. Anyway, there is a little too much smug as you get into your third and fourth replies, when one can read between the lines "VCs need to see a validated product because even then we don't know what we're doing and it's throwing darts at a board."

And I totally get why that is, I wouldn't have the appetite to take a risk on these guys, but it's just a bit amusing to me,

Jan 30, 2019

Hmm, certainly not intending to come off smug. At least for me, it's just to make sure the OP doesn't jump in, cold call all the VCs he can find, and then not put his best foot forward (not considering things that some VCs can find critical, or big turn offs). The problem is first impressions are pretty strong, and would hate for him to close doors with potential suitable partners (I think there was some stat floating around saying you only do 1 out of 100 or even 300 opps you see... so a lot of VC is saying "no"). Especially given the space (Capital Markets Fintech) is a tough place to raise capital - definitely fewer VCs with the particular appetite / interest / industry expertise.

    • 1
Feb 6, 2019

Fair enough. And I defer to the fact you clearly know a ton about the industry and I know zero, just how I took it initially

Jan 31, 2019

I don't get it. If you're a programmer with the business background, you should just quit your job/work on an MVP product in your spare time. Have a working demo, show it to potential customers, get them to sign an LOI, then go to a seed investor. It is HIGHLY unlikely that a VC/angel would fund you pre-product with significant capital (unless you/your daddy has a lot of rich friends). The best financing you should expect pre-product is a small amount of capital (<$200k) at a low valuation to pay for your ability to work on the startup full-time. I think you've got pie in the sky dreams here expecting a VC to throw you $2m for an idea that you may not even be qualified to execute.

    • 1
Jan 31, 2019

recall that in 2012, IEX (the new stock exchange from Flash Boys) raised 1.5mm in their seed VC round (775k to 8 non-US investors, and 725k to US investors). The founder was a trader with an idea...not a developer...he used the money to hire developers.

IEX went on to raise 100mm during 4 rounds over the next 3 years....and are now making 50mm/year and still growing

just google it...you're welcome

Jan 31, 2019

I know about IEX. I cannot corroborate your claim that they raised their seed round solely on an idea...they easily could have locked down some customers (LOIs etc.)/had mock ups and were able to present those to their potential investors. It is SUPER rare to raise capital pre-product/pre-anything without some sort of prior relationship with the investor (whether that be friend/family, past co-worker, prior entrepreneurial experience). Your best bet would be to create a short deck outlining exactly what your new exchange will do, what value it adds to both sides of the exchange, and TALK to potential customers and get their feedback/preliminary buy-in to sign on to your exchange. At that point, you should be able to raise some seed capital. It seems like you have this belief that a VC/angel is just going to gamble and give a part time entrepreneur money to you at a high valuation to build out a "vision" that has zero proof that it will work. While VCs do invest in risky startups, they don't throw money at any idea off the street because an idea is a dime a dozen.

There are many many startups out there that are pursuing larger opportunities than you are, working full-time unpaid for years on end, and still struggling to raise money.

FYI, I would not recommend reaching out to VCs, you're way too early for a venture fund. I'd recommend reaching out to rich people that you know who strongly believe in your abilities to be your first investors.

    • 4
Jan 31, 2019

I'd start with the principal investing arms of all the major investment banks. In addition to the fact that they all seem to be making strategic fintech investments these days and can potentially spare you all the challenges (described above) that you'll encounter with traditional VCs, they're going to give you the market's best signal as to whether your idea is good or not.

Jan 31, 2019
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Jan 31, 2019
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just google it...you're welcome